Wall Street; The C.E.O. as Investing Sucker

By Susan Antilla

Published: July 26, 1992

Securities lawyers who gather to schmooze about the latest sexy case against a Wall Street brokerage firm are no longer swapping stories about the proverbial little old lady in tennis shoes who was put into risky stock options.

Instead, they're noting with some surprise that a new breed of investor is bringing arbitration cases against brokers -- and winning. If the little old lady was the classic wide-eyed sucker, the new sucker is much the opposite: savvy, educated and a player in the business world. Indeed, among the winners in recent arbitration cases are an M.B.A., the chief executive of a utility company and a law firm's managing partner.

The average Joe and Jane no doubt take some heart in knowing that one needn't be an outsider to the business world to wind up a loser with one's broker. The Harvard M.B.A., apparently, can be duped as easily as the schoolteacher.

"You have to make a distinction between a sophisticated investor and someone who may be sophisticated in other ways," said Walter T. Weathers Jr., a Houston lawyer who represented Alberto Garza Santos, a member of a Mexican family of billionaires, in a recent arbitration. "The issue in arbitration is whether the person has sophistication in the securities markets."

Arbitrators "are looking more at the acts of the broker than the circumstances of the claimants," said Samantha Rabin of Securities Arbitration Commentator. "They're saying the fact you're wealthy doesn't keep you from being ignorant."

Take the case that Mr. Weathers tried on behalf of the Tottenham Corporation, owned by the wealthy Mexican family. At first glance, it might seem ludicrous that the wealthy principals of Tottenham did not have the financial expertise to police their Bear, Stearns & Company broker. But arbitrators for the National Association of Securities Dealers told Bear, Stearns in May to pay Tottenham $1.58 million in compensatory costs, as well as $1 million in punitive damages, based on claims of breach of fiduciary duty, among other infractions. Bear, Stearns had no comment on the case.

Mr. Weathers said that a key difference in fighting and winning such a case on behalf of a well-heeled client is that brokerage firms are increasingly being forced to disclose information they used to hide. Until recently, he said, brokerage firms were vastly more uncooperative about turning over documents. "But now customers are able to get brokerage firm internal documents, and it puts them on a more even basis," he said.

What that meant for Mr. Weathers was the ability to persuade arbitrators that his client had not ordered securities that Bear, Stearns claimed were "unsolicited." Mr. Weathers requested, and got, account records of other clients of the broker, and showed that they were being put into the same securities -- at the same time -- as his client. "If the broker says these were all the customer's ideas and the customer says they were the broker's, the arbitrators need a way to decide," he said. "Well, these records make that judgment easier."

Susan Drogin, a Boston lawyer who represented a Harvard M.B.A. and entrepreneur, Steven Belkin, in a recent hearing, said her case against PaineWebber was also aided by the ease of access to documents.

She served up research reports for arbitrators showing PaineWebber was telling all its clients to buy the same stocks it claimed her client had ordered on his own. "PaineWebber said they were unsolicited trades," she said. "But we put in evidence that they were initiated because of research reports."

(PaineWebber said the $2 million awarded on June 30 was only part of the $15 million in losses, implying that "a great deal of the responsibility was with the client.")

Absent such documents, arbitrators are skeptical of the well-heeled investor, Mr. Weathers added. "If you've got your aunt from Kansas saying, 'I don't know anything about these trades,' it's a lot easier to believe" than similar claims from business professionals.

The New York Stock Exchange and the N.A.S.D. have had procedures to help both sides get the documents they need for an arbitration hearing since 1989. Even after procedures were set up, though, "firms would always say it was privileged and confidential" when asked for other clients' trading records, said Robert Clemente, director of arbitration at the N.Y.S.E. So the exchange put together a list of documents that could reasonably be expected to be produced, making it easier for investors to get documents -- or a good excuse as to why they weren't available -- within 30 days.

Well-heeled investors have also begun to benefit from the "growing up" of the arbitration process in the years since 1987, when the Supreme Court made it nearly impossible for investors to sue a brokerage house. "Arbitration panels are more sophisticated, and are looking beyond the cosmetics of whether the investor should have known better," said Mark Maddox, who represented the managing partner of an Indiana law firm who won a case against Shearson Lehman in June. (The investor insisted on anonymity; Shearson would not comment.)

And it doesn't hurt that the brokerage industry itself has changed, said Guy Burns, a Tampa, Fla., lawyer whose client won $3.5 million in punitive damages from Cigna Securities in March. Mr. Burns said the breakdown of corporate loyalty among job-hopping brokerage firm executives has unleashed a gold mine of expert witnesses for plaintiffs. "It used to be that potential witnesses would never testify against a major firm," he said. But in hearings last year for his client, a local utility-company chief executive named George H. Gage, Mr. Burns offered up expert witnesses including a former Merrill Lynch broker and a pension fund adviser. Ultimately, the $3.5 million in punitive damages was awarded, though Cigna appealed, and a nonpublic settlement was made.